The following item is a Letter of Intent of the government of Turkey, which describes
the policies that Turkey intends to implement in the context of its request for financial support
from the IMF. The document, which is the property of Turkey, is being made available on the
IMF website by agreement with the member as a service to users of the IMF website.

1. We have continued to make good progress in implementing the
ambitious agenda spelled out in the Memorandum on Economic Policies (MEP) attached to our
letter dated May 3, 2001. In that letter, we presented our strategy for
overcoming the recent crises and putting Turkey on a path to sustainable growth.This
strategy relies on strong structural reforms, prudent fiscal and monetary policies under a floating
exchange rate regime, and an enhanced social dialogue. Following the completion of the sixth and
seventh reviews on May 15, we have maintained a good record in implementing our
program. The quantitative performance criteria for end-May were observed with large margins,
and we have taken further steps in banking and other structural areas (Annexes A and B). Indeed, since May 3 parliament has continued to
work with extreme speed. It has approved all the laws and legal amendments foreseen in the
program, providing an impressive record of structural reform. On this basis, we request
completion of the eighth review under the stand-by arrangement. We also request modification of
the ceilings for the performance criterion on the cumulative primary expenditure of the central
government for the remainder of 2001, in line with the supplementary budget adopted by
parliament on June 14 (Annex C).

2. We have been encouraged by the initial results of our program.
The benchmark treasury bill rate fell by over 50 percentage points between mid-April and
mid-June. After the sharp increases in the price level in March and April following the large
depreciation, the more modest price increases in May indicate that CPI inflation remains on a path
broadly consistent with our initial inflation estimates. While we have not yet moved to formal
inflation targeting, which we intend to implement as soon as feasible, we are projecting CPI
inflation at 18 percent in the second half of the year, and we aim at bringing inflation down
to about 2 percent per month (on a seasonally adjusted basis) in the final quarter. Indicators
of economic activity confirm a recession in the early part of the year, but we expect the
restoration of confidence, strong export growth and expenditure switching, and record-high
tourism activity to help initiate a recovery in the second half of the year, limiting the decline in
GNP to the projected 3 percent in 2001. The developments on the external current
account in the first quarter of the year are in line with the projected broad balance for the full
year.

3. We remain firmly committed to the unfaltering implementation of the
program, with the help of strong international financing support and an open communications
policy. The May 3 letter remains the main document describing our policies
for 2001–02, and is updated in the present letter in a number of areas. To fulfill the
program's financing needs, we have secured substantial official and private financing. The recent
augmentation of IMF support under the stand-by arrangement and the forthcoming support from
the World Bank under the Programmatic Financial and Public Sector Adjustment Loan are the
key elements of the official financing package. As for private sector involvement, we recently held
meetings with foreign banks in Frankfurt and New York, and have received commitments from
these banks to maintain their current exposure to Turkish banks and to seek to rebuild their
interbank and trade credit lines as the program is implemented. On our communication policy, we
are taking a number of initiatives to better explain the economic program to the investor
community and the public at large. We have published the May 3 letter and the MEP and,
for the first time, agreed to the publication of the IMF staff report. The Treasury has hired new
external communication staff, enhanced the contents and frequency of press releases, and is
preparing fact sheets on aspects of the program on its website. The Central Bank of Turkey
(CBT) and the Bank Regulation and Supervision Agency (BRSA) have both held meetings with
the media and the banking community to explain the program, and have posted information about
the program on their respective websites.

Incomes policy

4. Incomes policy will continue to play an important role in the program.
Wage negotiations for public sector workers were concluded in late May. We estimate that
the two-year agreement will lower the ratio of average net salaries of public sector workers and
civil servants from 2.6 in 2000 to 2.2 in the first contract year before raising it to 2.3 in the
second contract year. While the agreement therefore results in a significant realignment of the
relative wage of public sector workers in 2001, the outcome was not fully in line with our
objectives. Nevertheless, the unions agreed to postpone payment of the wage increase slated for
the first six months of the contract to early 2002, and the agreement involves a substantial decline
in real wages in 2001. To offset the additional cost to the public sector of about 0.4 percent
of GNP in 2001, we have taken a number of measures to achieve the targeted increase in
the public sector primary surplus (see paragraph 7 below). Moreover, we will strengthen the
dialogue with social partners to encourage moderate wage and price increases in the private
sector. To this end, the Economic and Social Council will meet at least once a quarter and will
become more central to the dialogue now that its legal status has been strengthened. In these
meetings, the achievements and objectives of the program will be highlighted, and we will
encourage forward-looking price- and wage-setting behavior anchored to the program's targets,
including through wage and price guidelines for the private sector consistent with the inflation
objective. In addition, the Minister of State for Economic Affairs will continue to make a
determined outreach effort to labor unions, industrialists, employers, and bankers.

Fiscal policy

5. Our fiscal efforts in 2001 have been strong. In the consolidated
central government, the primary surplus (excluding privatization proceeds, transfers of profits
from the CBT, interest receipts, and the cost of state banks' recapitalization) through April at
1.8 percent of annual GNP was somewhat above our projections, owing to the strong
performance of the withholding tax on interest income in April, and preliminary data for May
suggest an even larger, and more broad-based, overperformance. Regarding policy efforts, in May
we raised VAT rates as planned, and increased the minimum contribution base relevant for social
security payments by 40 percent, while increasing the contribution ceiling from four to five
times the minimum contribution. We also raised petroleum consumption taxes by
over 20 percent in May and by 16 percent in June, more than originally planned. In
the state enterprise sector, we have made substantial progress in implementing the comprehensive
set of measures specified in paragraph 32 of the May 3 MEP. With the exception of the
public sector wage agreement and the grain support price decision (see next paragraph), all these
measures have been implemented as planned.

6. Nevertheless, there have been some deviations from original plans.
The public sector wage agreement will add TL 250 trillion to the central government wage bill
and TL 410 trillion to the wage bill of state enterprises this year. We will also need TL 80
trillion more than originally budgeted to cover the additional civil service wage bill arising from
slightly higher-than-projected CPI increases earlier this year. Moreover, the increase in the wheat
support price by a weighted average of 63.4 percent exceeded targeted inflation, resulting
in an additional cost to the public sector of TL 200 trillion. Finally, in line with World Bank
advice, we have increased direct income support to farmers by TL 100 trillion compared
with the May program. All in all, these deviations add some TL 1 quadrillion (0.6 percent
of GNP) to public expenditure this year.

7. We have taken offsetting measures to remain on track to meet our
public sector primary surplus target of 5.5 percent of GNP in 2001. Achieving
this target is a key part of our strategy to ensure a sustainable debt position. The additional
measures we have already put in place are as follows. First, as mentioned above, we raised
petroleum consumption taxes in May and June more than originally planned, and in the remainder
of the year will increase them monthly at least by WPI inflation. Second, in the state enterprise
sector, we have decided to increase electricity and gas prices more than originally planned.
Specifically, the average price of electricity sold by TEAS (the electricity generation company)
will rise gradually to US$5.1 cents/kwh by the end of the year, so as to achieve an average of
US$4.5 cents over the year, the tariffs of TEDAS (the electricity distribution company) will
increase accordingly, and the average sale price of BOTAS (the natural gas company) will reflect
input costs strictly. Third, on June 11 TEKEL (the tobacco and alcohol company) increased
cigarette and alcohol prices by 16-22 percent. Fourth, to increase the activity of private traders in
the grain market and to allow TMO (the soil products office) to regulate the market with
minimum cost, the government has issued a decree setting the margin between the purchase and
sale prices at 18-26 percent, compared with 12-20 percent last year. In total, the above-mentioned
measures are estimated to yield 0.3 percent of GNP in the remainder of the year. We believe that
these measures, together with the stronger-than-expected revenue performance in April and May
(with a full-year effect of 0.3 percent of GNP), will fully compensate for the remaining additional
fiscal cost of the deviations mentioned in the previous paragraph.

8. On June 14, parliament approved a supplementary budget
for 2001 consistent with the program objectives, meeting a condition for the completion of
the eighth review. This budget targets the consolidated central government primary surplus
at 5.2 percent of GNP (excluding privatization proceeds, transfers from the CBT, interest
receipts, and the cost of state banks' recapitalization) and incorporates the impact of all the
revenue and expenditure measures described in detail in paragraphs 30-31 of the MEP attached to
our letter of May 3. While the supplementary budget provides only an overall envelope for
expenditure, we will protect the real value of spending on health, education, and social areas. To
ensure that the primary surplus target is reached, the Ministry of Finance stands ready, if
necessary, to issue directives to reduce discretionary noninterest expenditure relative to budget
allocations during the year.

9. Supporting measures are being introduced to reduce government
borrowing costs and facilitate the placement of government debt. The Treasury's domestic
borrowing program for June is based on the strong primary budget position and the use of
external resources, allowing for a sharp reduction in the domestic debt rollover ratio to
47 percent for this month. Strong fiscal policy and the use of additional external assistance
are expected to keep the Treasury's domestic borrowing need well below redemptions during the
second half of 2001. To reduce this need further and lengthen the maturity on domestic
debt, the government has undertaken a voluntary debt swap, prepared with the help of advisors
from two international investment banks. The auction held on June 15 was successful, resulting in
an exchange of some US$8 billion of short-maturity Turkish lira government paper for a mix of
longer-dated Turkish lira and foreign exchange indexed government paper. Other steps to
improve debt management are also being taken. A committee of public and private sector
representatives will announce in July its proposals to institute a strengthened primary dealer
system by end-August. The legal framework for debt management will be provided by a new Law
on Public Finance and Debt Management. Preparations are on track for the draft Law to be
submitted to parliament by end-June.

Monetary and exchange rate policy

10. In its pursuit of price stability in the transition toward direct inflation
targeting, the CBT will continue to focus on the control of monetary aggregates under the
floating exchange rate regime. Developments through May—base money below (but close to)
the program's indicative ceiling, and inflation and growth broadly on the projected path—indicate
that there is no need to revise the monetary parameters in the program at this point.1 Hence, the CBT will aim to keep base money closely in line with the
indicative ceilings specified in Annex E of the May 3 MEP. This base money
path—designed to be consistent with our inflation and growth projections—will continue to be the
key nominal anchor for the program. The CBT stands ready to raise money market rates even if
base money is close to its target, should other inflation indicators suggest that the disinflation
process is in jeopardy. Regarding NDA, as indicated in the May 3 MEP, the ceilings
specified in the program allow for the bulk of the external financing to be used to reduce the
government's borrowing needs, thereby facilitating a decline in interest rates and contributing to
the sustainability of the government's debt position. To keep NDA within the targeted path, the
CBT will adjust money market interest rates as needed. To offset the expansion of NDA resulting
from the use of external financing, the floors on Net International Reserves (NIR) have been set
to allow the CBT to mop up this additional liquidity through the sale of foreign exchange. Starting
in July, the CBT will announce to the markets the timing and amounts of its auctions to sell
foreign exchange tied to the external resources being lent to the government to alleviate its
borrowing requirement. These sales of foreign exchange will coincide as much as possible with
any creation of domestic liquidity generated by the use of those resources by the government in
financing its domestic operations. Any other intervention in the foreign exchange market will be
strictly limited to the smoothing of short-term fluctuations, and will be effected primarily through
auctions. In this regard, the CBT will also refrain from lending or borrowing foreign exchange in
the interbank market.

11. The CBT is making progress in the preparatory work to move to a
direct inflation targeting framework as soon as feasible. It is enhancing its information base,
including through improving its structural and short-term models and preparing new surveys of
financial markets' expectations about inflation and other macroeconomic indicators, which will
start by September 2001. During the preparatory phase, the CBT will continue to discuss
inflation targeting with officials from countries that are implementing such a monetary policy
framework, and will seek further technical assistance as needed. The CBT is improving its
communication strategy also in this area, to clarify both how monetary policy is being conducted
in the transition to inflation targeting, and how it will be carried out once the transition is
complete.

Structural policies

Banking

12. We will make every effort to keep banking reform on track:

The strengthening of state banks is progressing well. The three state
banks with negative net worth (Ziraat, Halk, and Emlak) have been recapitalized to the regulatory
levels. The overnight position of these banks (and the banks owned by the Savings Deposit
Insurance Fund, SDIF) was eliminated by mid-June, and the stock of repurchase agreements of
state and SDIF banks with the CBT was brought to below TL 7 quadrillion by end-May (both
are conditions for completing the eighth review). A law (see below) has been approved
by parliament to facilitate the closing of Emlak (that is, the revocation of its license) and the
transfer of all its liabilities and some of its financial assets to Ziraat and Halk (another
condition for completing the eighth review). Moreover, a reporting system has been put
in place to monitor profits/losses, liquidity, and interest rate margins in the state banks. The
reports generated by this system indicate that Ziraat and Halk now have positive margins and that
deposit withdrawals have so far been limited. Independent outside auditors have also been
appointed for each bank. Finally, a law has been passed by parliament to allow the implementation
of several key measures in reforming state banks. The law includes provisions to (i) facilitate the
closure of Emlak, (ii) promote the operational restructuring of state banks, and (iii) remove the
government's power to impose duty losses in the future.

Substantial progress has been made in the resolution of SDIF banks. The SDIF
banks have been recapitalized to cover their negative net worth. We are in the process of
finalizing the sale process of three banks: Demirbank, Bank Ekspres, and Sümerbank (the
first transition bank). The closure of Ulusal has now been completed, with its assets and liabilities
having been transferred to Sümerbank for resolution. The process of selling Iktisat will
commence once the Sworn Bank Auditors finalize their evaluation of the bank's financial position.
On June 15, the BRSA issued a decision to merge three of the remaining four SDIF banks
(Etibank, Interbank, and Esbank) into a second transition bank (under Etibank), while the fourth
one (Türk Ticaret) would be closed down. Merging these banks into a transition bank or
placing them into liquidation is a condition for completing the eighth review.

The capital bases of private banks are being strengthened. The BRSA has
assessed the financial condition of all 27 private domestic deposit-taking banks, and commitment
letters will be signed with all the banks identified as financially weak or undercapitalized (a
condition for completing the eighth review). In these letters, the managements of individual
banks will be required to commit themselves to take action, by specific dates, to strengthen the
financial condition of their banks and to ensure appropriate capitalization levels. Initial steps in
recapitalizing these banks will be taken immediately, and some capital will already be raised before
end-June 2001, followed by additional capital augmentation steps from then until the end of
year, by which date all banks are expected to be in full compliance with all prudential regulations.
BRSA will promptly impose sanctions prescribed in the Banking Law on any bank that does not
fully comply with the commitment letter. These sanctions range from the replacement of managers
and board members in less severe cases to full intervention in the case of more serious violations.
Assessment of compliance with the commitment letters will be a focus area in the subsequent
program reviews.

In May, the CBT put in place an enhanced monitoring system to provide weekly
data on interest rates offered by individual banks. Combined with daily bank-by-bank data on
interbank transactions, these data provide early warning of liquidity pressures and facilitate early
intervention of problem banks.

Legislative amendments and the newly-appointed professional BRSA Board will
help reinforce the implementation of banking reforms. The amendments to the Banking Law
enacted on May 28 have provided (i) immunity for BRSA staff from prosecution for
actions taken while performing their duties; (ii) tax deductibility for specific loan loss provisions;
(iii) that a regulation on connected lending in line with EU regulations will be issued by June 28,
2001 (a structural benchmark); and (iv) additional powers to the SDIF's
Collection Department (COD) in carrying out loan recoveries. Moreover, we are in the process of
fully staffing the COD, and preparing operational guidelines for loan recovery. In addition, we will
transfer all the nonperforming loans of Sümerbank above TL 75 billion (some
1,200 loan files) to the COD by end-July. Finally, a law to eliminate the remaining tax
hurdles for mergers, including in the financial sector, has been approved by parliament.

Enhancing the role of the private sector in the economy

13. Privatization, including preparations for divestiture of large
state-owned assets, is moving apace. We expect that a new professional board and
management team of Türk Telekom will be put in place shortly, meeting a condition for
completing the eighth review. The immediate priority of the new Telekom Board will be to
adopt a plan for corporatization. The Privatization Administration is working on a privatization
plan for Türk Telekom in accordance with the new Law, which the Ministry of Transport
will present to the Council of Ministers as soon as the plan is finalized. While the timing of sale of
individual enterprises will depend on market conditions (which in turn are linked to our progress
in implementing the economic program and restoring financial stability), the Privatization Agency
is moving ahead with the preparation for privatization of assets in its portfolio. Specifically,
advisors have been engaged for the further sale of state participations in TUPRAS (the oil
refinery) and POAS (petrol stations), and we expect that the public offering of both companies
could be carried out in the fourth quarter of this year. Now that domestic air fares have been
liberalized, the public offering for Turkish Airlines is also foreseen for the fourth quarter.
Following the adoption of the Sugar Law in April and the new Tobacco Law in June (the latter is
a condition for completing the eighth review), we will move ahead with the privatization
of the sugar and tobacco factories in the context of our agricultural reform program supported by
the World Bank. In the steel sector, a major operational restructuring involving the reduction of
the workforce is underway, in preparation for the eventual privatization of ERDEMIR through a
merger with ISDEMIR. Following a review of obstacles for the sale of state-owned land, legal
amendments to facilitate these sales will be submitted to parliament by the summer recess. All in
all, we believe that the targeted US$1 billion in privatization proceeds in the remainder of
this year is well within reach.

14. We are also making progress in improving the business climate.
The law to implement the constitutional amendment on international arbitration was
approved by parliament on June 21, meeting a structural benchmark. A study on
administrative barriers to investment by the World Bank's Foreign Investment Advisory Service is
expected to be completed in late June. In view of the need to incorporate the views of all relevant
agencies, the conference to discuss the conclusions of this study can only be held in early
September, and will be followed by the presentation of an action plan to the Council of Ministers
shortly thereafter.

Transparency

15. The work toward improving the transparency and efficiency of public
management is moving ahead. In particular, we have adopted a tax regulation in June that
extends the use of tax identification numbers (TINs) in the financial sector starting in
September 2001, meeting a condition for completing the eighth review. The tax
administration will make full use of the information provided by the TINs to broaden the tax base
and improve compliance. We also remain committed to improving fiscal accounting and reporting.
In May, the Treasury and IMF staff organized a two-day seminar on budget classification and
accounting, and held technical discussions on how to move toward accrual accounting. Since
then, we have started publishing in the monthly reports of the Treasury a "lending minus
repayments" item to monitor the payments by Treasury of called guarantees and the
amounts repaid. A new budget classification in line with international standards has been
completed, and will be implemented in six pilot budget agencies for the 2002 budget. The
law providing for the closure of the remaining 15 budgetary funds (except DFIF) and two
extrabudgetary funds was approved by parliament on June 19, meeting an end-June
structural benchmark.

16. We are also moving ahead with a three-pronged plan to improve
governance in the public sector and promote effective government. First, a Public
Expenditure and Institutional Review (PEIR) was completed with a series of intra-governmental
workshops in Ankara in May, with the support of the World Bank. An international conference
will be held in November to disseminate and discuss the findings of the PEIR study. Second, an
international conference on Promoting Good Governance and Anti-Corruption in Turkey
will be held in early September, also with the support of the World Bank, to diagnose the
problem, develop actions, and mobilize political support. Third, to strengthen the code of conduct
of government officials, a law to streamline the prosecution of public officials has been forwarded
to parliament.

17. Following up on the fiscal transparency report completed last year, we
are requesting the preparation of the data module of the IMF's Reports on Observance of
Standards and Codes (ROSC). Last summer's ROSC module on fiscal transparency was well
received. We believe that the data module will provide a useful assessment of our economic data
and dissemination practices, further adding credibility and transparency to our economic data and
policies. We expect an IMF team to visit Ankara in October to work with us on this report.

Very truly yours,

/s/
Kemal Dervis
Minister of State for Economic Affairs

/s/
Süreyya Serdengeçti
Governor of the Central Bank of Turkey

1Annex D, which is a revised version of Annex E of the May 3 MEP,
clarifies the definition of net domestic assets (NDA) under the program. The NDA ceilings are not
affected by the clarification. The clarification involves replacing paragraph 4 of Annex E of
the May 3 MEP by two new sentences.